Videogames’ future may be free of charge

More U.S. publishers building games around free-to-play model

By

DanGallagher

SAN FRANCISCO (MarketWatch) — For an industry battered by declining sales and rising competition, a future in which the main product is available free of charge does not appear to be the most appealing prospect.

Yet more videogame makers in the U.S. are pursuing precisely this model, under which games cost nothing to play and only make money through advertising or — more commonly — in-game transactions.

EA

A scene from the online version of “Command & Conquer,” which EA plans to launch as a free-to-play game next year.

Game publishers do this in part because the disk-based retail business has weakened considerably, with sales of new game software in the U.S. sliding more than 30% in the first six months of this year compared to the same period last year, according to data from NPD. Read full story about the slump in videogame retail sales.

The drop in sales has led many investors to sell the stocks of game publishers hard this year — making some more vulnerable to takeover speculation. Electronic Arts Inc. saw its shares rise on Thursday on a media report that a couple of private-equity firms were interested in the company, which has lost more than one-third of its market value this year. Read about buyout chatter affecting EA.

Zynga Inc.
ZNGA, +0.40%
has achieved some success through bringing games such as “FarmVille” and “CityVille” to the Facebook Inc.
FB, -1.26%
platform, though these titles have appealed primarily beyond the crowd of traditional gamers to a more casual audience.

In certain foreign markets — mostly in Asia — the same model is used for what is considered “core” games, which include high-profile blockbuster franchises such as “Call of Duty” from Activision Blizzard Inc.
ATVI, -1.04%
and the “FIFA” soccer property from Electronic Arts
EA, -1.04%
Pure-play companies like Tokyo-based Nexon Co. (3659) focus exclusively on free-to-play titles for core gamers, while venture capitalists in the U.S. have poured hundreds of millions into startup companies building games using this approach.

The key question is whether the free-to-play business model will become predominant in the U.S. game business, which remains mostly based on disks sold through retail outlets.

“We view this as a tsunami going on in the games business. It’s been happening around the world, and it’s coming to the West,” Nexon CFO Owen Mahoney said in an interview earlier this month.

Frank Gibeau, president of EA’s games labels business, made a similar point in a keynote address at the Gamescom conference in Germany on Wednesday, predicting that free-to-play “will become the dominant pricing model by the end of this decade.” He noted that EA’s revenues from these sorts of games have surged by 156% over the last year.

“The low barrier to entry makes the game more accessible to millions who might have balked at the price of a disk,” Gibeau said, according to a script of his speech provided by EA. “And at scale, this audience can contribute as much or more revenue than traditional disc-based games.”

At the convention, EA announced that it had decided to make the next iteration of “Command & Conquer,” a 17-year-old strategy franchise, available under the free-to-play model, with a launch date sometime next year.

Videogames coming this fall

(3:47)

Dan Gallagher on digits previews some of big-ticket video-game titles to be released this fall, including from the Halo, Call of Duty and Assassin's Creed franchises.

“The impact of this audience and revenue cannot be underestimated,” Gibeau said. “It has forced us to re-think many of the fundamental assumptions about our most storied game franchises.”

Not all are sold on the idea.

“There’s a market for it, but the notion that in three years, all games will be free-to-play is ludicrous,” said Doug Creutz, videogame analyst at Cowen & Co., in an interview.

Creutz thinks there is “no way to justify the development dollars” spent to make a triple-A game such as “Call of Duty” for a free-to-play model. Most games of this nature are sold for $60 a pop at GameStop
GME, -0.67%
or other retail outlets. Most free-to-play games draw revenues from a small portion of their user base who are willing to pay for extra items designed to enhance the experience.

“There will be more free-to-play titles, and some will be successful, but I still suspect the biggest titles will have customers paying up front,” Creutz predicted.

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